BofA update shows where active managers are putting money
This is the most important chart to watch for asset allocators.
Over the last 10 years people loved bonds because of one simple yet amazing property - a negative correlation to stock markets.
Investors got so used to the negative bond/stock correlation that they assume it’s always going to be there - but history shows that’s not true.
As the chart below from my friend Dan Rasmussen shows by going back almost 200 years:
- The stock/bond correlation is actually positive (!) if core inflation is above 3% (red area)
- The magic negative correlation feature only kicks in with core inflation predictably below 3% (green area)
The inflationary year of 2022 was a wake-up call for many: bonds and stocks dropped together and the ’’unbeatable’’ 60/40 portfolio ended up causing a lot of damage.
Family offices, pension funds, endowments and investors around the world who built a portfolio on the assumption that ’’bonds are always a good diversifier for my stocks and risky assets’’ had a very bad time in 2022.
So here is why this is a key chart to watch for macro investors.
Core inflation has been stuck around 3% for a bit, and given the outsized deficits and tariffs it could be this way for quite some time.
Next year, investors might need a hedge for their (failing) hedges – long bonds (and long the US Dollar).
A truly diversified portfolio shouldn’t only rely on bonds as a diversifier: for periods of heightened macro volatility, investors should also be exposed to true diversifiers like commodities, gold, hedge fund strategies like global macro, and other alternatives.
Do you think bonds will act again as a perfect portfolio diversifier?
Or do you also look at other diversifiers like commodities or hedge funds?
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